Non-inflationary growth is the key challenge

Most of the macro parameters of the Indian economy indicate a significant improvement compared with the situation in mid-2013. However, reviving the economy and pushing GDP growth higher without stoking inflationary pressure is the main challenge before the government. Post the 2008 crisis, the fiscal and monetary stimuli did revive the GDP growth fairly quickly but could not sustain it as it focused more on demand-side management. In 2014, however, the new government will have to address supply-side bottlenecks on priority over the demand-side factors if it wants Indian economy to return to a sustainable high growth path.

No doubt, curbing inflation should be the top-most priority of the new government. This would necessitate a multi-pronged strategy. While RBI is pursuing tight monetary policy to tame inflation, the government will have to formulate a new agricultural policy to address stubborn food inflation. This policy must address the changing food consumption patterns of Indian households and accordingly incentivise the crop mix and its production. Cutting down the intermediaries between the farm gate and the ultimate consumer should be at the centre of this strategy.

Besides controlling inflation, reviving investment at this juncture is critical to stimulate GDP growth. The Cabinet Committee on Investment has laid the foundation for an investment revival by clearing projects worth 4.9% of GDP till April 2014. The government can kick-start the stalled investment cycle by resolving some of the vexed tax issues such as retrospective taxation/tax disputes and establishing better coordination with states.

The new government can also consider some innovative modes of infrastructure financing. It can allow IIFCL, PFC, NHAI and NABARD to issue bonds of 20-year-plus tenor which can qualify under the provision of RBI’s statutory liquidity ratio (SLR) norms. This would not only ensure lower cost of borrowing for these lending institutions but also reduce asset-liability mismatch risk due to the longer tenor. While the government is better off providing viability gap funding to smaller projects, large infrastructure projects can benefit more from equity participation, continuous government supervision and accountability. Most infrastructure projects have a long gestation period and need long-term financing. Also, globally, infrastructure is created by the government.

Another area that requires serious attention of the government is the manufacturing sector. Manufacturing growth, besides directly contributing to tax revenue and GDP growth, reduces unemployment and poverty. Reducing infrastructure deficit is critical to accelerate manufacturing growth, but this alone will not be sufficient. The government will